How will the carbon tax repeal affect Australians?

The Abbott-led Government has promised huge reductions in household electricity prices following the repeal of the carbon tax.

Legislation to repeal the tax is currently being drafted by the Government and industry heavyweights have teamed together to make a submission.

The Energy Supply Association of Australia, the Energy Retailers Association of Australia, the Energy Networks Association, the National Generators Forum and the Australian Pipeline Industry Association - known collectively as the energy industry - issued a joint statement on November 5.

The energy industry announced that savings from the repeal of the carbon tax will be passed on to consumers in the same way the original costs of the tax were.

Australian consumers can currently see the cost of the tax on the bottom of their power bills.

Prime Minister Tony Abbott has said this saving could be as much as $550 per year for the average household once the tax is scrapped in the middle of 2014.

However, electricity suppliers have said this estimate is too high and average households will not see the promised 9 per cent reduction on their electricity bills and seven per cent on their gas prices.

The Government has promised consumers immediate reductions once the changes have been made, but the Australian Industry (AI) Group has warned that the effects will not be seen straight away as there are other factors to take into consideration.

AGL Energy told the Australian on November 6 that non-carbon factors such as the cost of green schemes - like the renewable energy target - have contributed to a rise in the cost of electricity.

The energy industry's submission stated that the impact of the carbon tax depends on the region, supplier and the retailer and so the effects of the carbon tax may be felt differently across the board.

The industry also said price reductions may take longer to filter down to consumers.

The carbon tax will have been in place for two years by the time it is repealed and Energy Supply Association Chief Executive Matthew Warren said the legislation is even more complex than the introduction of GST.

He said the sooner legislation is passed, the quicker the industry can make changes so households can see reduced electricity and gas prices.

"The legislation to introduce the carbon price became law eight months before it started. This gave the industry time to ensure a smooth introduction," he said.

Providing the legislation is passed by the current parliament, removal of the tax can begin on July 1 2014.

The government has said the Australian Competition and Consumer Commission (ACCC) will be given extra powers to make sure savings from the tax repeal are passed onto consumers.

Labor has said the current government's climate change strategy will actually cost consumers more than the carbon pricing.

How does carbon pricing work?

Carbon pricing mechanisms are used in various countries around the world and, in Australia, was introduced through clean energy legislation that put a price on carbon pollution.

In essence, the big industry players and manufacturers are liable for the amount of carbon they emit each year, which is roughly 60 per cent of the country's total output.

Any businesses that produce more that 25,000 tonnes of carbon dioxide emissions over a year must pay a set price per tonne of emissions created.

These costs are indirectly passed onto consumers in their power bills.

Electricity

The combustion of fossil fuels - coal and gas - forms around 90 per cent of electricity generation. These emissions can also be seen in final stages of gas combustion.

The carbon tax passed on the cost of these emissions to consumers in different ways.

Electricity producers sell energy to the wholesale energy markets, the National Energy Market (NEM) and the Wholesale Energy Market (WEM). NEM covers all the states with the exception of Western Australia, which is covered by WEM.

Electricity suppliers purchase power from producers and have what is called 'forward contracting arrangements,' meaning they purchase power in advance and estimate how much it will cost.

This makes it difficult to calculate the carbon price as the generation can vary.

Other factors impacting the price of electricity

The cost of generating electricity makes up around 30 per cent of the household electricity bill, which also includes the cost of transmitting it, distributing it and retailing it to consumers.

Other factors include the various state-based energy efficiency schemes, feed-in tariffs if you have solar powered energy, and the Renewable Energy Target.

These elements make it difficult to predict how much electricity prices will fall when the carbon tax is repealed and if any of these changes will affect the amount seen on household energy bills.

Gas prices

Most of the carbon emissions are produced towards the end of the gas combustion process and responsibility lies with a small number of gas retailers to pay the carbon price, under the Clean Energy Act of 2011.

However, emissions are also released when gas is transported.

Once the carbon tax is repealed, retailers will pass a reduced cost onto consumers because their own supply costs will have been reduced.